In recent months, several regions of the world have experienced extreme weather conditions; this ranges from floods in China, Europe and India to smoke from wildfires in Serbia that reached the North Pole for the first time in history. Similarly, in Greece and Turkey, the impact of wildfire has been devastating as forest cover was lost and many people were forced to leave their homes. In North America, the situation is quite the same as the United States and Canada have also been exposed to smoke from wildfire which has exacerbated air pollution as heavy haze from wildfire drifted to other parts of these two countries.
For many decades, the world has been experiencing the never-ending ruinous impact of extreme weather conditions which is mainly attributed to climate change. From rising sea levels, food insecurity, water scarcity, increasing global temperature, floods, heat waves, etc., all these occurrences paint a vivid picture of a looming crisis for the world. A recent report (2021) from the Intergovernmental Panel on Climate Change (IPCC) of the United Nations has confirmed the impending cataclysmic impact of climate change. In the last 40 years, each decade has been progressively warmer than the decade that preceded it; this has been the trend since 1850.
An in-depth analysis shows that in the first two decades of the 21st century, from 2001 to 2020, global surface temperature was 0.99°C higher than from 1850 to 1900. Again, from 2011 to 2020 global surface temperature was 1.09°C higher than what was recorded from 1850 to 1900. Within this period, rising temperature on land accounted for the largest increase with 1.59°C, while temperature increase from the ocean also contributed 0.88°C. The increasing global surface temperature has been accompanied with unprecedented changes. For example from 2011 to 2020 the annual arctic sea ice area reached its lowest level since 1850.
Researchers have identified human-induced climate change as the main driver of all these extreme weather conditions. The increasing contribution of human activity to greenhouse gas concentrations is stimulating the climate, forcing a change in the earth’s energy balance that leads to warming or cooling effects over time. To avert a climate crisis, it is essential to mitigate all human-caused climate change activity that is fostering this change. Practically, this daunting task cannot be achieved without the world’s energy sector transitioning from the use of fossil fuel, which is the primary driver of climate change, to clean energy sources.
According to the International Energy Agency (IEA) the energy sector accounts for about three-quarters of the world’s entire greenhouse gas emissions. This positions the energy sector as the focal point in the fight against climate change. Transforming how energy is produced, transported and consumed will be critical in attaining the net-zero emissions by 2050, and the preferable 1.5°C global temperature. However this gargantuan transformation cannot be achieved without the support of the global financial system. To bolster the transition from fossil fuel consumption to the use of clean energy, adequate funding is required from financial institutions to strengthen clean energy infrastructure which includes, but not limited to, research and development to accelerate the production of innovative clean energy technologies to meet the world’s growing energy demand.
By serving as an intermediary between lenders and borrowers, the financial system is vital for allocating funds for green projects; through green financing, innovative financial services such as green bonds and green loans are facilitating the development of clean energy infrastructure. Although green banking has been instrumental in developing clean energy, this financial resource has its downsides. With a large proportion of bank deposits categorised as short and medium-term transactions, banks are usually reluctant to lend to clean energy projects, particularly those that require long-term financing; in most cases, banks prefer lending to less risky projects. This is one of the major setbacks that is limiting access to green finance for clean energy infrastructure development in many developing countries.
This finance gap for clean energy infrastructure development could be addressed by involving non-bank financial institutions such as insurance firms and pension funds which have the capacity to provide long-term funding for clean energy projects. Also, the impact of these institutional investors in providing green finance for clean energy projects could be augmented with the inclusion of financial technology (fintech) firms. The inclusion of fintech firms could eliminate constraints in accessing green financing for clean energy projects in urban, remote and rural areas.
While the integration of the services of these financial institutions to improve green finance for clean energy projects has been anything but easy for many countries, China, which is a pioneer in green finance, has been making remarkable progress in this area. In my previous article for the China Global Television Network (CGTN), I discussed the impressive progress China is making in developing clean energy infrastructure in an effort to achieve carbon neutrality. For example, in 2020 China installed the world’s largest capacity of renewable energy, which amounted to 895 gigawatts. In the same year, the combined renewable energy capacity of Canada, Germany, France, United States, Japan and Italy was less than China’s total renewable energy output.
How did China become the largest producer of renewable energy? Well, this accomplishment has been possible partly because China has the highest patents in renewable energy technologies. By providing adequate investment via green finance to build clean energy projects, and also promote research and development (R&D) for renewable energy technologies, China has been able to accomplish this feat; in 2019 alone, China invested US$83.4billion into renewable energy research and development, representing the highest in the world.
Again, by the end of 2020, China’s green loans amounted to US$1.8 trillion, the largest in the world. In the same year, the country’s total green bonds reached US$125billion, representing the world’s second-largest. By strengthening green finance via fintech for the development of clean energy infrastructure, China is making significant progress toward achieving carbon neutrality by 2060. Even though there is still room for improvement, China’s commitment to develop green finance to support the transition from fossil fuel to clean energy is worthy of emulation. Countries could demonstrate their cooperation and dedication to fighting climate change by enhancing green finance to support clean energy development. This could be carried out by supporting green projects such as the belt and road initiative (BRI) in an effort to attain carbon neutrality and save the world from climate change.
About the author
Alexander is an economic consultant, chartered economist and a chartered financial analyst with a keen interest in the economic landscape of countries in Asia and Africa.